Major funding obstacles still lie ahead

THE €1.1 BILLION pledged by private investors from North America last month helped Bank of Ireland skip its capital hurdle and avoid State control – the only Irish bank to do so.

But the country’s biggest bank still faces major obstacles on funding and underlying profitability. The net interest margin – the difference between what the bank pays for deposits and charges for loans – has been squeezed sharply as the bank is paying substantially more for deposits and being charged more to borrow under the State bank guarantee.

As part of the deleveraging of the banks ordered under the EU-IMF bailout, the bank has also lost €18 billion in loans and other assets on which it earned interest last year. Finance director John O’Donovan described this as “a dramatic fall-off”. The bank has a further €17 billion to shed before it weans itself off Irish and European Central Bank life support and returns to self-sufficiency. It plans to do this sooner rather than later but this will squeeze the interest margin further.

Unsurprisingly then, Richie Boucher, the bank’s chief executive, signalled that interest rates on loans would have to increase.

Boucher is only one of two surviving chief executives who held boardroom seats prior to the financial crisis. Kevin Murphy at Irish Life and Permanent is the other.

Boucher gave an oblique response to a question about whether the private investment into Bank of Ireland would strengthen his case to stay in his job in light of the Government’s desire to remove pre-crisis directors and the upcoming fitness and probity tests of bankers by the Central Bank.

The bank had met challenges and had “a very high focus on delivery” – “if we say we are going to do something, we do it”. But he acknowledged that the bank still faced challenges – it had to deleverage, raise deposits, reduce costs. Bank of Ireland also had to be “professional and constructive” in engaging with the Central Bank, he said.

Following the recent capital raising, the State has been left with a 15 per cent stake but the country’s main “pillar” bank is still heavily reliant on Central Bank loans to fund itself and a recovery in the economy – as precarious as that might seem – to restore profitability.

But Boucher was upbeat, even talking about the return of surplus capital to shareholders if the bank hits its targets to get the bank back on track by 2014.

“It is certainly possible but I don’t think anyone is betting on that right now,” said banking analyst Niall O’Connor at Credit Suisse.

That is except perhaps Canadian fund Fairfax and the bank’s other new North American investors.